Friday, February 14, 2014

In early November 2013, the Subcommittee on Consumer Protection, Product Safety, and Insurance (part of the Committee on Commerce, Science, and Transportation) of the United States Senate held a hearing on possible measures against deceptive demand letters by patent trolls. It remains to be seen what will ultimately come out of this effort at the federal level, but a state legislature is at the forefront of this issue. On Thursday, the Judiciary Committee of the Kentucky Senate voted unanimously in favor of a bill (SB116) that seeks "to establish a bad-faith assertion of patent infringement as a violation of Kentucky's consumer protection chapter and authorize the utilization of the remedies available for those violations in addition to private remedies established in the bill".

This is the most comprehensive effort I've seen so far to lay out factors weighing for and against allegations of bad-faith patent assertions. Clearly, a lot of thought has gone into the design of a bill (Word document) that aims to make a distinction between good-faith and bad-faith patent licensing activities. It's similar to a bill enacted by the Vermont Legislature last year.

The bill mentions that the state Attorney General is not meant to be restricted by this bill in any way, but the bill itself focuses on a defendant's right in bad-faith litigation or litigation following bad-faith demand letters. Paragraph 3 ensures that defendants have a basis for demanding a bond at any stage of the proceedings ("[u]pon motion by a target and a finding by the court that a target has established a reasonable likelihood that a person has made a bad-faith assertion of patent infringement").

These factors may be considered as evidence of a bad-faith assertion:

A demand letter fails to state the patent number, the name and address of the patent owner(s)/assignee(s), or specific factual allegations relating to the infringement claim.

Information reasonably requested by the taret of a royalty demand is not provided within a reasonable period of time.

The roaylty demand is not based on a reasonable valuation.

The claim is meritless and the patent holder knew or should have known this.

The claim or assertion is "deceptive" (not defined).

Previous behavior and litigation can affect subsequent actions (for example, earlier demand letters that failed to satisfy the criteria laid out in the bill).

The patent holder is a non-practicing entity.

Any other factor the court finds relevant.

And these factors can support a patent holder's claim that an assertion was not made in bad faith:

The demand letter contains the information the bill requires.

If the original demand letter did not contain it, the patent holder may still be able to cure the defect by providing the information, on request, within reasonable period of time.

The patentee "engages in a good-faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy".

Substantial investment in use of patent or in production or sale of product or item covered by it.

The anti-NPE assumption is counterbalanced by assumptions in favor of patent holders or original assignees who enforce a patent themselves, and institutions of higher education and any technology transfer entities they own.

Previous behavior can be helpful to a patentee if he previously demonstrated good-faith business practices in enforcement of the same patent or a substantially similar one, or successfully enforced the patent or a substantially similar patent through litigation.

Any other factor the court finds relevant.

Patent law is part of federal law, and I don't want to get into a discussion here of ways in which state laws can indeed have a bearing on patent infringement litigation. I just wanted to draw additional attention to this truly interesting effort, and I hope that something will be done at the federal level -- and at some point over here in Europe as well -- against bad-faith demand letters. The Kentucky bill is definitely a valuable and constructive contribution to the debate. Should it have a statistically identifiable effect after being passed into law (which I hope) in terms of discouraging assertions against Kentuckians, then I'm sure other legislatures will consider similar measures. Ideally the pressing problem of bad-faith demand letters would be addressed by others even before.

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About Me

Florian Mueller is an app developer who used to be an award-winning intellectual property activist. His 30 years of software industry expertise span different market segments (games, education, productivity and infrastructure software), diverse business models, and technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof, except that he is long AAPL.) He is now developing games for smartphones and tablet computers.